04 May 2012

This morning's papers (4 May 2012) had coverage of yet another leaked budget measure. This one was about removing the special arrangements for those remaining recipients of parenting payment whose youngest child is aged at least 8 (for single parents), or 6 (for partnered parents). These parents are still getting parenting payment and have been since before July 2006 when the current age limits (8 and 6) were introduced.

At the moment this "special" group continues to have the pre-July 2006 age limit of 16 years applied to them. The significance of the age limit is that parenting payment is not paid unless a parent has a child younger than these cutoff ages. When the youngest child hits the cutoff age the parent has to apply for some other type of assistance, typically Newstart allowance. You know - the allowance that's been getting quite a bit of media attention lately because many people consider it's not enough to live on.

For partnered parents it's not much of a change, simply because the partnered rates of parenting payment and Newstart allowance are the same. For single parents it's a bigger issue because the single rate of parenting payment is rather more than the single rate of Newstart allowance. For them, moving to Newstart allowance means a reduction in disposable income. So, let's look first at how much of a reduction is involved.

The newspaper items I read said the change was to start in January, but didn't give a year. They did say it was supposed to produce around $700 million savings over 4 years, so I've assumed this means January 2013 is the start date. I don't have a model of how the tax-transfer system might look in January 2013, but I do have a partly completed version for July 2012 and the charts below are taken from that. (Note that I modified it a bit to take into account the proposed relaxation of the Newstart allowance income test for single parents with a child under 16 that is supposed to apply from January 2013.)

The chart below shows how much disposable income would change if a single-rate parenting payment recipient with one child aged, say, 15 lost entitlement and took up Newstart allowance instead. It breaks this up into the various components of the tax-transfer system that change as a result.

You can see that at zero private income (in other words, people getting the maximum rate of parenting payment who then move to the maximum rate of Newstart allowance) the reduction in disposable income is a little over $3,000 a year. However, for those single parents who have earnings the loss increases, peaking at around $5,500 for those earning a little under $22,500. Most of the reduction in income comes from the difference in income support payments (parenting payment versus Newstart allowance), but there's a considerable contribution from an extra tax liability arising from a loss of access to (what will be) the seniors and pensioner tax offset. It's a similar deal with the medicare levy.

Now, the media coverage has suggested that one objective of this change is to increase workforce participation. (It's perhaps unfortunate then that the largest losses go to those who are actually doing just that.) So, another obvious thing to examine is how much single parents who lose parenting payment would have to increase their earnings to get back to their original disposable incomes. The next chart shows just that.

Here, the red line shows the gross extra earnings required to regain the former income. For example, the parent already earning around $22,500 loses around $5,500 (as detailed in chart 1), but to regain that lost $5,500 they have to earn around an additional $11,800. That's a total wage of around $34,300. For someone working at the minimum wage, that actually requires more hours than than a full-time job.

As difficult as this may seem, it's actually less onerous (if that's the right word) than what occurs under the current arrangement for these "special" single parents. Recall that they still have the old rule applying, whereby the transition to Newstart allowance occurs when the youngest child turns 16. That transition involves moving to a Newstart allowance that is at a slightly lower rate and has a tougher income test than modelled above. It looks like this:

Under the arrangement that the media reckons is being removed, the age-16 transition can produce losses of over $9,000 a year. The tougher income test means it's harder to regain lost income, with a worst case of over $15,800 extra earnings needed to retain the same level of disposable income.

These bigger losses are not exclusive to the special group. Single parents under the "new" rules experience an age 8 transition, which, from January 2013, will have the effects shown in chart 2, and, later, an age 16 transition from the "relaxed" Newstart to the standard flavour. The final position is as shown in the age 16 chart - it just takes 8 years and two changes to get there, instead of instantly at age 16. The change outlined by the media effectively makes the special (also known as grandfathered) group subject to a transition equivalent to the age 8 change all single parents who have come on to parenting payment since July 2006 experience. It's replacing one lump with two.

Of course, the coverage of the leak may have some factual errors, and so the above might be useless speculation. I guess we'll see on Tuesday.